Here's a follow up to this story:
UPDATE: Bond Insurer ACA Faces Midnight Deadline On Forbearance Pact
17:47 EST Friday, January 18, 2008
(Adds information on counterparties in seventh paragraph.)
By Lavonne Kuykendall
Of DOW JONES NEWSWIRES
As the rest of the U.S. corporate world begins a three-day holiday weekend, chances are bond insurer ACA Capital Holdings Inc. (ACAH) will be working the phones as if its life depended on it.
It does.
On Friday at midnight, the clock runs out on a demand that ACA get signed forbearance letters from clients of its financial guarantee business, allowing ACA to avoid posting nearly $1.7 billion in collateral on credit default swaps it wrote back when it still had an investment-grade credit rating.
In December, ratings agency Standard & Poor's cut ACA's credit rating to triple-C from single-A, sending the bond insurer deep into junk status and triggering contractual agreements ACA held with its customers that call on it to post collateral if its rating fell.
The collateral arrangement is unique to ACA among the larger bond insurers, all of which have suffered in recent months amid mounting concerns about their exposure to subprime mortgages and structured finance products. None of the seven triple-A-rated insurers, including MBIA Inc. (MBI), Ambac Financial Group (ABK) and Security Capital Assurance (SCA), has collateral triggers.
According to a Friday Wall Street Journal report, ACA is likely to get the extension, possibly as part of a rescue plan that would give the counterparties a stake in a restructured bond insurance company.
Negotiations are made complex by the number of counterparties who must agree on a solution - between 10 and 50 banks, brokers and other parties - according to a person familiar with the last-minute talks. The person said ACA is hoping to find a permanent solution that could give contract holders ownership stakes, but may have to settle for agreement by the counterparties to extend the deadline for putting up collateral rather than throwing ACA into receivership.
Following S&P's downgrade, Maryland's Department of Insurance issued an order giving ACA one month to either raise the money or get long-term forbearance agreements from all its credit default swap counterparties. While the deadline is at midnight Friday, a spokeswoman for Maryland's Insurance Department said that the office was unlikely to act over the coming three-day weekend.
A spokesman for ACA, which is headquartered in New York but incorporated in Maryland, said Friday afternoon that the company was still "working on it" and couldn't say when it might report on whether it was successful in securing an extended forbearance agreement.
If ACA is unsuccessful, the regulator would institute delinquency proceedings in Baltimore Circuit Court, according to the Maryland insurance department spokeswoman. It has the option of asking that ACA be placed under conservation, rehabilitation or liquidation, any of which would put a regulator-appointed receiver in charge of the company.
Some of ACA's customers have already taken write-downs in the value of securities that had credit guarantees from ACA.
Canadian Imperial Bank of Commerce (CM) said in December that ACA acted as a counterparty to $3.5 billion of its U.S. subprime real estate exposure and that the bank would likely take a "large charge" in its first quarter to cover potential losses. As of Nov. 30, it said its mark-to-market loss on the hedge was $2 billion. A CIBC spokesman declined to comment Friday on whether the bank will let ACA off the hook in posting collateral to cover potential losses.
Merrill Lynch & Co. (MER), another ACA customer, said Thursday it would set aside $1.9 billion for contracts insured by ACA's financial guaranty business. A Merrill Lynch spokeswoman said the company would not comment on whether it would agree to waive ACA's collateral.
According to an estimate by Oppenheimer analyst Meredith Whitney, UBS AG (UBS) will have to write down $1.4 billion in ACA-backed hedges. She estimates Citigroup (C) will write down $1.398 billion in losses. UBS declined comment on Friday.
In Securities and Exchange Commission filings, ACA has said it would be unable to come up with $1.7 billion in collateral if it lost its A rating.
The Maryland consent order acknowledges ACA's inability to post that money. At Sept. 30, ACA had approximately $426 million of statutory capital and approximately $712 of total admitted assets.
Customers like Merrill Lynch and others that have already written off their ACA business may have an incentive to refuse to grant ACA a collateral waiver, said Donald Light, an analyst with Celent LLC, in an interview Friday.
"They don't have an incentive to agree to forbearance because they have already taken the hit," Light said. But refusing to waive the collateral agreement would force competitors who have not yet written down the holdings to do so.
-By Lavonne Kuykendall, Dow Jones Newswires; 312-750-4141; lavonne.kuykendall@ dowjones.com
(Jed Horowitz contributed to this story.)
Here's the kicker for this story:
In Securities and Exchange Commission filings, ACA has said it would be unable to come up with $1.7 billion in collateral if it lost its A rating.
What kind of ripple through will this have?
